^[1]If the economy is bad, stocks should go down.  And if the economy is good, stocks should go up.  Right?

Wrong.

Dead wrong.

The movement of the stock market in “today’s world” has very little to do with economic activity.

In case you haven’t noticed, there are economic problems swarming around the world, and talk of a “Great Recession II” is alive and well for later in 2012.  If the world isn’t dragged down by Europe, then it will be by China’s growing issues.

But that doesn’t matter.  Stocks don’t care.  What the world cares about right now is the current liquidity crisis.

You see, there is way too much money floating around out there.

That’s a crisis?  Yes, a big one – because the banks aren’t loaning any of that cash.  They are hoarding it for themselves.  They don’t care about you or about helping the economy.  They could care less.  They’d rather park it into something safe, which, in this economy, means anything but a low interest loan to a person who may or may not have a job a year from today.

And it’s credit that drives the economy!  It’s credit that is the lifeblood of growth.  The banks have the power in their hands to jump start this economy into something great.  But they could care less about that.  They aren’t on our side.  They are on their side.  It’s important to realize this and to remember it.  They don’t care.  If you are going to do something great in this world, learn to not rely on the banks.  It’s the ultimate form of self-reliance.

If the money isn’t flowing to people, where is it going?

Money not flowing to people, real human beings, means that money is flowing into assets.  Grains, gold, silver, oil, bonds, copper, and yes, even stocks, are benefitting from this phenomenon.  People with money to invest can reap the rewards of this current situation by simply “following the elephants” for the time being.

That being said, this cash float into assets will end in a very bad way.

The biggest bubble on the planet right now is the bond market, and believe it or not I expect it to go even higher.  This means banks would rather earn less than 1% on their money than risk giving it to you!

The good news is, this means if you have a home and you’d like to lock in a lower rate, now is the time . . . as long as you have fantastically good credit.  The bad news is, when this bubble comes crashing down, it means inflation will start to rear its ugly head . . . and that is what will be the undoing of this current stock market rally.

How to play this?

First off, trash cans are filled with busted brokerage statements from people who were “right” in their positions because of the fundamentals.  Eventually their positions played out just like they thought they would, but because they got in too early, they lost it all.

Fundamentals – the “real story” of what’s going on in the world – are important for sure.

But fundamentals and reality take time, sometimes a lot of time, to come together.

And sometimes this can take years.  For instance, if the fundamentals are crap, but the government continues to print cash – they are going to delay the impact the fundamentals will eventually have on the market place.  That’s the situation we have today.

This is why it’s so important to watch bonds.  As long as they are moving higher, or trading near the top of their range, then the printing press is alive and well.  There is no sane reason to fight this, especially in order to “be right.”  There is a saying I have taped to my desk.  It says, “Would you rather be right or would you rather make money?”  I know many people who have been right but got in way too early . . . and today they are flat broke.  Personally, I’d rather have the money.  Money is flowing into assets, period.  There is nothing to short; at least not yet.

This current stock market rally seems to have no end in sight.  As I’m writing this, the S&P 500 is at new highs for the year right under the 1,340.00 price level.  There isn’t much resistance until the 1375.00 price level.  I’m continuing to play the long side by buying call options on SPY and I’m on the alert for technical signals that will tell me this market is ready for a crash.  Until then . . . stay long . . . and stay tuned.

Successful investing,

John Frederick Carter

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